To whom will you pass your legacy?

One of the most important things you’ll ever do for your practice — for your family, for your clients and for your colleagues — is plan for how you’ll pass it on.

The task of choosing the right individual is a significant challenge, both professionally and personally. Depending on your situation, this could be your opportunity to watch a child come into his or her own, or it may be a reward for a longtime employee who invested years in helping build the practice. But even if it involves passing ownership to a willing buyer with whom there isn’t a long-term relationship, this decision is the linchpin of your succession plan.

Here are the four main options available to you:

1. Transfer or sell ownership to a family member
Benefits:

•Clients often favor the family succession approach because of the continuity and business legacy associated with it.

•Relationship retention is among the highest of all succession methods.

•You’ll have the flexibility to pursue multiple ownership transfer options including gifting ownership, utilizing trusts, an outright sale or a private annuity sale.

Drawbacks:

•If handled improperly, having one family member become the business successor may cause friction with others.

•It may be difficult to keep business and emotions separate and, consequently, poor decisions might be made out of sympathy or a sense of obligation.

2. Transfer or sell ownership to a trusted colleague
Benefits:

•By passing ownership to a younger adviser you’ve groomed, you can ensure that your practice’s culture and standard of service won’t falter.

•This option helps to ensure the comfort and confidence of your clients and the retention of those relationships.

Drawbacks:

•In some situations, a younger associate may encounter challenges funding the buyout.

•If a suitable candidate isn’t already working in the practice, it can take significant time to identify and retain one.

3. Merge a practice with a new partner
Benefits:

•In the case of a solo adviser with no desire to seek out a junior partner to be the future owner of the practice, another independent adviser in the same geographic area may agree to enter into a working (versus legal) partnership — while maintain-ing separate practices. The expectation is that each working partner will be the ownership successor for the other adviser without consolidating the practices prior to the ownership transfer.

•You can establish a revocable trial agreement to test out the relationship before there is any formal agreement for the transfer of ownership.

•Neither adviser incurs any operating expenses or makes changes in his or her practice with this type of plan.

Drawbacks:

•Finding the right working partner may prove difficult if not impossible in some geographic areas.

•Partners may disagree and find themselves making certain concessions about the value of their practices.

4. Sell to an external buyer
Benefits:

•Generally requires a relatively short transition period for the selling adviser.

•Due to the transactional nature of these arrangements, this option may take less of an emotional toll on a selling adviser.

Drawbacks:

•While due diligence is an important part of any succession or acquisition, it is especially complex when selling to a party affiliated with a different broker-dealer, due to client privacy regulations.

•With this type of sale, you may not be able to secure continued employment for your staff with the purchasing adviser, and it is less likely that all of your clients will be retained by the purchaser.

•This option often requires more expert legal and tax advice on the various implications and proposed terms of the purchase.

These four approaches are by no means the only choices available to you, but most advisers find one or more of these strategies suit their circumstances. In making a decision on a succession strategy, it is important that you weigh the benefits and drawbacks of each alternative carefully.

Patrick Jinks is vice president of succession planning and acquisitions at Raymond James Financial Services Inc.

Related Topics: Practice Management